COVER STORY Family home in cities soaring further out of reach

by Chris McCormack

News Weekly, March 10, 2018

Australia has no affordable housing markets, according to the Demographia International Housing Affordability Survey: 2018.[1]

The 14th annual Demographia survey measured 293 international housing markets’ affordability in the third quarter of 2017 (the 2017 survey measured 406 markets at the end of the third quarter of 2016) and ranked them according to a median multiple (MM): that is, the median house price divided by median household income – with a score of 3.0 or below being affordable and 5.1 and over being severely unaffordable. The number represents how many years of pre-tax income would need to be earned to pay for a house.

Since the previous survey, Australia’s overall housing market has risen from a MM of 5.5 to 5.9, making it the second most unaffordable housing market in the world, after Hong Kong. Given that Australia does not have the problem of limited space as Hong Kong does, where the average living space is 14 square metres[2] and population density is 6,679[3] people per square kilometre versus Australia’s three people per square kilometre, it is fair to say that our housing affordability crisis is one derived in great part from urban containment policies set by governments rather than from limited space.

Urban containment involves limiting development around an urban area and limiting or prohibiting greenfield housing development (land that has not previously been built on) on the urban fringe. Urban containment limits the supply of new land, pushing up demand (and prices), with the emphasis placed on urban form at the expense of housing affordability. All of Australia’s major housing markets have urban containment policies.

Of the four Australian markets deemed “affordable” in the 2017 survey, only one, Gladstone, was included in the 2018 survey. It had crept up from an affordable MM of 2.8 to a moderately unaffordable MM of 3.2. The median house price in Gladstone was $279,500 and the median pre-tax household income $88,300.[4]

Australia’s five major housing markets all remain severely unaffordable. Sydney remained the second least affordable housing market in the world after Hong Kong (with an MM of 19.4), rising from a MM of 12.2 to 12.9.

Melbourne also climbed in the unaffordability stakes, rising from 9.5 to 9.9, making it the fifth least affordable market in the world, while Brisbane rose from 6.2 to 6.3. Adelaide was steady at 6.6, and Perth actually fell a little, from 6.1 to 5.9. Australia’s capital cities capped off a list of the 21 least affordable major housing markets (that is, urban centres with a population over 1 million) in the world.[5]

Eye-popping bubbles

The median price of a house in Sydney was $1,177,600, while the median household income was $91,600. In Melbourne, these figures were $817,000 and $82,800.[6] The UBS Global Real Estate Bubble Index 2017 ranks Sydney the equal fourth most likely city in the world to experience a housing bubble, beaten only by Toronto, Stockholm and Munich, and tying with Vancouver.[7]

Changes to the MM in other Australian housing markets from 2016 to 2017 were: Darwin, down from 4.8 to 4.3; Alice Springs, up from 4.3 to 4.6; Hobart, up from 5.5 to 6.2; Bendigo, down from 5.7 to 5.4; Ballarat, down from 5.5 to 5.4; Cairns, steady at 5.9; Canberra, down from 6.2 to 5.8; Gold Coast, down from 9.0 to 8.4; Geelong, down from 7.2 to 7.1; Rockhampton, down from 4.1 to 3.9; Townsville, up from 4.1 to 4.2; Toowoomba, down from 5.5 to 5.0; and Sunshine Coast, down from 9.0 to 8.5.

In the housing markets listed above where the MM decreased, Darwin’s house prices fell, as did Bendigo’s, Canberra’s and Rockhampton’s. In Ballarat, Gold Coast, Geelong, Toowoomba and the Sunshine Coast, the lower MM was due to the median household income rising more than the increase in median house prices.

In Cairns, both median house prices and median household incomes increased leading to no change in the MM; while, in Alice Springs and Townsville, median household income decreased proportionally more than the decrease in median house prices, leading to higher unaffordability.[8]

When compared with international housing markets (see Figure 1), Australia’s lack of a policy to rein in housing prices is exposed. The United States has the most affordable of major housing markets, with an MM of 3.8; Japan is at 4.2; Canada 4.3; the United Kingdom 4.5; Singapore 4.8; and Ireland 4.8.[9]

Demographia points to the cause: “Typically, the housing markets rated ‘severely unaffordable’ have more restrictive land use policy, usually ‘urban containment’.” It adds: “More severely unaffordable housing is strongly correlated with higher overall costs of living and thus lower standards of living between housing markets.”[10]

Far from being an indicator of the untapped wealth of its citizens, unaffordable housing prices lead to a lowering of living standards as more income is channelled into repaying mortgages at the expense of quality of life – not to mention the ever-present threat of a mortgage default on increasingly larger loan amounts if employment circumstances change, and the possibility of the house being repossessed.

Runaway housing prices may benefit high-income earners who can purchase numerous investment properties, having the ability to pay them off quickly while reaping the benefits of capital gain. But for the average punter, it means buying a house is out of the question, relegating them to a life of renting (at inflated prices) and resulting in other flow-on effects, such as delaying or ruling out starting a family, forgoing holidays, or even food or electricity.

One of the arguments federal governments have used to rule out removing negative gearing is that, if housing investment is encouraged via negative gearing, this will add to the housing stock, in turn lowering demand and therefore rental prices. As any property investor knows, apart from long-term capital gains, which can never be guaranteed, the investment must generate an annual return in order to stack up financially.

A general rule of thumb is that residential rents should return $100 a week for every $100,000 worth of property,[11] although rental rates often fall outside this investor ideal. But, with burgeoning property prices come sky-high rents. If housing were more affordable, people now forced into renting could buy their own homes, thereby pushing down rental demand and rental prices.

Perhaps the fact that 48 per cent of our federal MPs own numerous investment properties, according to a 2017 ABC News report, is a reason there is reluctance to abolish negative gearing. However, if its removal were grandfathered – that is, if it applied only to properties bought after the change to the law and did not apply retrospectively – it is hard to see that this alone would bring about a meaningful reduction in house prices.

The urban containment policies, however, which began to be put in place by state governments in Australia in the late 1980s, are more responsible for the juggernaut-like housing prices than is negative gearing. Abolishing negative gearing would provide significant price relief only if done in conjunction with state governments relaxing restrictive policies around land release.

As Figure 1 shows, Australia had a house price to income ratio (or MM) about 2.8 in 1987. After urban containment policies were brought in, this figure immediately rose to just over 3.0 then plateaued before rising rapidly between 1997 and 2003 when it peaked at just below 6.0, before coming down a little to 5.5. Figure 2 shows the relationship between urban containment policies and housing unaffordability in metropolitan areas with over 2 million people around the globe; while Figure 3 plots Australia’s capital cities’ rapid rise in unaffordability after containment policies were implemented.

Adding to the woe of potential NSW homeowners is the NSW Government’s decision to uncap infrastructure levies on developers. The Australian reports (“Levy change ‘could boost new-home price $50,000’ ”, February 19, 2018) that the Government plans to lift the cap on 94 levies that councils charge developers for infrastructure in 2020, ironically, as part of a housing-affordability strategy.

The move could save the Government $100 million per year but the Urban Development Institute of Australia (UDIA) and Property Council warned that “[c]hanges to biodiversity regulations … could add up to between $20,000 and $30,000 per lot, while uncapping section 94 could add anywhere between $30,000 to $80,000 per dwelling.’’

Fuelling the high demand for housing is the annual intake of migrants, which has numbered between 176,500 and 299,900 each year between 2007 and 2016. Additionally, a Freedom of Information request by Credit Suisse analysts Hasan Tevfik and Peter Liu to state governments to release tax figures revealed that foreign buyers are buying 25 per cent of new properties in NSW and 16 per cent in Melbourne, equating to $8 billion worth of property each year. Chinese buyers comprised 80 per cent of the foreign buyers. The data was compiled for the period from July 2016 to January 2017.[13]

The Federal Government has made changes to tax laws around foreign ownership of Australian property, including removing the exemption from capital gains tax (CGT) on their principal place of residence in Australia, increasing the withholding rate on CGT from 10 per cent to 12.5 per cent, and reducing the threshold of the disposal price of the property at which the foreign resident capital gains tax withholding payment applies from $2 million and above to $750,000 and above. Foreign owners are now also charged an annual fee for owning unoccupied houses that have not been genuinely available on the rental market for at least six months each year.[14] The effect these changes will have on the rates of foreign home ownership has yet to be measured.

The NSW Government has doubled the stamp-duty surcharge for foreign investors and increased the annual land-tax surcharge from 0.75 per cent to 2 per cent; while in Victoria foreign investors now pay an additional 7 per cent tax on top of their land-transfer duty.

The Chinese Government has also placed an annual limit of $50,000 on foreign currency purchases by individuals. Forecasting from ANZ/Property Council of Australia predicts that the state, federal and Chinese measures will result in fewer foreign buyers of Australian property this year.[15]

Such steps to bring about a supply-and-demand balance are necessary and welcome, though Demographia sums up the consequences of urban containment policies in this way: “In contrast with well functioning housing markets, virtually all the severely unaffordable major housing markets covered in the Demographia International Housing Affordability Survey have restrictive land use regulation, overwhelmingly urban containment.”[16]

The hardship, inequality and rise of the working poor brought about as urban containment policies have pushed house prices either beyond the reach of many or enslaving those who do take out huge mortgages is a blight on society that was completely avoidable. State governments serious about tackling home affordability need to put affordability before urban form and scrap containment policies if home ownership is to be within the reach of median-income earners.